Consumption of fixed capital

CFC refers to a depreciation charge (or "write-off") against the gross income of a producing enterprise, which reflects the decline in value of fixed capital being operated with.

The Capital Consumption Allowance measures the amount of expenditure that a country needs to undertake in order to maintain, as opposed to grow, its productivity.

Gross domestic product (GDP) equals net domestic product (NDP) + CCA (Capital Consumption Allowance): How much the depreciation charge actually will be, depends mainly on the depreciation rates which enterprises are officially permitted to charge for tax purposes (usually fixed by law), and on how fixed assets themselves are valued for accounting purposes.

This can be arguable and very difficult to answer, and in practice, various conventions are adopted by accountants and auditors within the framework of legal rules and economic theory.

Furthermore, businesses might engage in creative accounting and deliberately state their assets and liabilities held at a balance date, or interpret the figures in some other way, to increase the amount of depreciation write-offs, and thus boost their income (how this is done will depend a lot on tax law).

Its value may therefore diverge considerably from depreciation actually recorded in business accounts, or as allowed for taxation purposes, especially if there is price inflation.

However, NNI represents the income actually available to finance consumption and new investment (excluding the replacement of capital consumed in production).

The net, or written-down value of a fixed capital asset is equal to its current replacement cost, less CFC accrued up to that point in time.

Thus, the criticism centres both on the valuation principles used, and the additional items included in the aggregate, which are not directly related to depreciation charges in business accounts.

Consequently, operating expenditures associated with fixed assets other than depreciation should be regarded as either as circulating constant capital, faux frais of production or surplus value, depending on the case.